Stock Drop Shocks! – But There Were Some Subtle Warning Signs

Stocks were down hard on Friday and volatility spiked. The market was unprepared but it should have been for several reasons.

The major indices started the week lower and then gapped down on Tuesday. That was quickly forgotten by the end of trading on Wednesday, as they stabilized or moved slightly higher. That is all the indices but the Russell 2000 SmallCap Index ($RUT) which slipped below its 20 period moving average and into lower Bollinger band range.

I “tweeted” this out on Wednesday. It seemed important because of the small caps penchant for leading the broader market, and the short-term significance of the 20 day average.

Then there were the warning signs on the FANG charts. The Facebook (FB) spinning top candle, an Amazon (AMZN) gravestone doji, the three-day eveningstar pattern, and Alphabet’s ominous doji cluster. The details are covered in this post.

I have been noting my concern about the Apple (AAPL) chart for some time beginning here, here, and here.

Also, Disney (DIS) has been a concern recently and was highlighted here, and with a follow-up here.

This is not to say that these postings and tweets would be suggest that the Dow was headed for a 665 point drop. The signs were subtle and they did not suggest a drop in share value of this magnitude. But something was up.

The Russel 2000 index does often lead the other indices either up or down and the 20 day moving average is the demarcation line of the bullish and bearish ranges of the Bollinger band indicator. There were serious warning candles on the FANG charts. (Despite Amazon’s relative strength today, the chart still looks weak.) Those four names have been the lead dogs in the tech sector and the tech sector often leads along with the small cap stocks.

Over the last several years the market has recovered very quickly from pullbacks. That might not be the case this time. Technical damage has been done to the charts, as well as psychological damage to investors thinking about the vulnerability of some of the biggest names in their portfolios.